This country-specific Q&A provides an overview of Restructuring & Insolvency laws and regulations applicable in Thailand.
What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?
Major forms of security under Thai law granted over property are mortgages, pledges and business security.
A mortgage is a non-possessory security whereby the mortgagor assigns a property to a mortgagee as security for the performance of an obligation without delivering the property to the mortgagee. Amortgagecanbeestablishedoverimmovableproperty (e.g.landandbuildings) or certain movable property, such as movable property which may be registered under relevant laws (e.g. machinery).
A mortgage agreement must be made in writing in the Thailanguageandregisteredwiththecompetentofficial(s), e.g. local Land Office for land and building mortgages. Failure to comply with the formality requirements will render the mortgage agreement void and unenforceable.
A pledge is a possessory security whereby a pledgor delivers to the pledgee pledged property as security for performance of an obligation. Certain assets representing value such as shares, bills of exchange, promissorynotesandchequescanalsobepledged by delivery of the document of the title or right to the pledgee.
Apledgeisnotrequired to beregistered with a governmental body. To perfect a pledge, pledged property must be delivered by the pledgor to the pledgee. If the pledged property has been returned to the pledgor, the pledge is extinguished by the function of law. In the case of a pledge of shares, a share certificate must be delivered to a pledgee to perfect that pledge. For a share pledge to be valid against a company and third parties, a record of the pledge along with the name and an address of a pledgee must be registered in theshareregister book of the company. Absence of the record of the pledge intheshareregisterbook of the company will not void thatpledge, but will result in a creditor not being able to claim the pledge against the company or third parties.
Business security is a non-possessory security whereby the security provider places certain types of assets with a security receiver for the performance of an obligation. Assets whichcouldberegisteredasbusinesssecuritycomprise of: (i) business (property used by the security provider in its business operations and other rights related to its business operations); (ii) claims (excluding rights represented by instruments); (iii) movable property used by the security provider for business operations e.g. machinery; (iv) immovable property (if the security provider operates an immovable property business); (v) intellectual property; and (vi) any other assets as provided in the Ministerial Regulation issued under the Business Security Act.
Abusiness security agreement must be made in writing,and registered with theBusinessSecurityRegistrationOffice. If it is notregistered, the creditor will not be able to claim priority over such asset against third parties and will not be ranked as a secured creditor in bankruptcy proceedings.
What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?
A general method for enforcement of a mortgage is through public auction, which requires judicial enforcement. Prior to enforcement, the creditor must provide notification demanding the debtor performtheir obligationsatleast 60 days in advance. Ifthedebtorfailstoperformtheir obligations, the creditor can enter an action in court for a judgment ordering the mortgaged property to be seized and sold by public auction. If a mortgage is established by a party who is not the debtor of the secured obligation (a third-party mortgagor), the mortgagee must also send notification in writing to the third-party mortgagor within 15 days of providing notice to the debtor.As a result, there are several processes to be taken before the actual enforcement takes place, which means that enforcement of a mortgage through public auction is quite time-consuming.
Foreclosure of the mortgaged property by the mortgagee can be used as an alternative method for enforcement of a mortgage. In the event that there is no other mortgage or preferential rights registered over the mortgaged property, and if (i) the debtor has failed to pay interest for five years, and (ii) the mortgagee has proven to the court’s satisfaction that the value of the property is less than the amount due, the mortgagee is entitled to foreclose on the mortgaged property. However, due to the difficulties of fulfilling these requirements, foreclosure is not common in practice.
Liability fora deficiency in the case that the proceeds of the enforcement of a mortgagedonotcover all obligations
The debtor, as mortgagor, is not liable for a shortfall even though sale proceeds of a mortgaged property are inadequate to pay the whole amount of debt, unless the parties agree otherwise. A third-party mortgagor is not liable for a shortfall, and any agreement which holds such mortgagor liable for a shortfall or liable as a guarantor, whether specified in a mortgage agreement or as a standalone agreement, is invalid. Note that such restrictionsare saved for cases where a debtor is a juristic person and its authorized manager mortgages his property to secure obligations of such debtor and executes a separate guarantee.
What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?
Corporate restructurings and insolvency in Thailand are principally governed by the Bankruptcy Act B.E. 2483 (1940), as amended, (“Bankruptcy Act”) and the Civil and Commercial Code (“CCC”). Restructuring and insolvency in Thailand can only be worked outthroughformal court proceedings, i.e. i) bankruptcy proceedings (including composition) and ii) business rehabilitation proceedings.
As a general rule, an insolvency test is required to commence proceedings under the Bankruptcy Act.
In the case of bankruptcy proceedings, a balance sheet test is available; whereas in rehabilitation proceedings, both abalance sheet test and a liquidity test are availableprovided that only one of these tests is triggered with an order to initiate the rehabilitation proceedings.
With respect to the balance sheet test, a list of presumptions is available under the Bankruptcy Act where the debtor will be presumed “insolvent”, for example, the debtor has transferred or delivered its assets with dishonesty or with fraudulent intent etc.
The Bankruptcy Act also provides a list of presumptions where the debtor will be presumed “to have no ability to pay” for the purposes of the liquidity test in order to be entitled to submit an application for business rehabilitation (wherea debtor, which is a small or medium sized enterprise).An example of this is ifthe debtor’s assets are insufficient compared to the liabilities that the debtor has.
There is no requirement that will oblige any directors or officers of the debtor companies to initiate insolvency proceedings (neither bankruptcy nor rehabilitation proceedings). However, if a liquidator of a dissolved debtor, when initiating a voluntary winding-up, discovers that the entire contribution or paid-up shares and assets are insufficient to cover liabilities, the liquidatormust begin bankruptcy proceedings against the dissolved debtor without delay. If a liquidator fails to do so, the liquidator may face criminal liability under the Act on Offences Concerning Registered Partnerships, Limited Partnerships, Limited Companies, Associations and Foundations B.E. 2499 (1956) (“Corporate Offences Act”).
What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?
Bankruptcy proceedings arecourt-supervised proceedings torealize the assets of the debtor in order to distribute the proceeds among its creditors.After taking of evidence, if the court views that the debtor is insolvent, an absolute receivership order will be issued against the debtor.Consequently, all business operations of the debtor will cease, and an official receiver will be appointed to supervise the debtorduring the proceedings.A formal court-initiated composition prior to bankruptcy will also be availableto stop the debtor from becoming bankrupt,wherebya creditors’ meeting and the court will approve and verify the composition proposal of the debtor.If composition fails, the court is empowered to adjudge the debtor asbankrupt. The realization and distribution process will be supervised by the official receiver.
Under normal circumstances, the entire timeframe for these proceedings will be approximately12-18 months.
How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?
The debtor’s assets will be distributed to the creditors in the following order of priority:
a) Secured creditors
b) Creditors of the following costs and debts
official receiver’s costs and expenses;
fees of the petitioning creditor and counsel’s fees as the court or the official receiver may prescribe;
taxes due within six months prior to the court order for receivership and wages of the debtor’s employees; and
any other debts.
c) Creditors who under the law or contract are entitled to receive repayment only after other creditors have received repayment in full; and
d) A creditor who is a spouseof the debtor.
Generally, creditors within the same class will receive the same treatment, unless a creditor in such class agrees otherwise by written consent. TheBankruptcy Act has provided that according to c) above, equitable subordination will be applicable for the proceedings only ifthey are specified under other specific laws or contracts.
Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?
The Bankruptcy Act hasstipulated the provisionsfor invalidation of particular transactions commenced before filing insolvency proceedings.
In bankruptcy proceedings, the official receiver is authorized to file a petition to the court for cancellation or revocation of (i) the transfer of the debtor’s assets during the 3-month period before the application to adjudicate the debtor as bankrupt was filed, if it has been proven that the debtor intended to give undue preference to a certain creditor(s); or(ii)any fraudulent acts done by the debtor within a 1-year period from the date that the act became known to the official receiver. The Bankruptcy Act alsoprovidesthe presumption that acts where the debtor received compensation in an amount less than reasonable, were done so to prejudice the rights of the creditors to be repaid.
In the case ofrehabilitation proceedings, the plan preparer, the plan administrator and the official receiver may also request that the court cancel or revoke(i)the transfer of the debtor’s assets during the 3-month period before the application for rehabilitation proceedings was filed, where it has been proventhat the debtor intended to give undue preference to a certain creditor or creditors; or(ii) any fraudulent act done by the debtorwhere the Bankruptcy Act presumesthat a debtor received less than a reasonable amount in a transactionwithin a 1-year period before the application for business rehabilitation was filed or after it is filed,where the intention wasto prejudice the rights of the creditors to be repaid.
Note that the request for cancellation or revocation as mentioned above,which may be requested under either bankruptcy or rehabilitation proceedings will not affect the rights of third parties who acquired the assets in good faith and for valuable consideration before the proceedingswere started.
What form of stay or moratorium applies in insolvency proceedings against the continuation of legal proceedings or the enforcement of creditors’ claims? Does that stay or moratorium have extraterritorial effect? In what circumstances may creditors benefit from any exceptions to such stay or moratorium?
In rehabilitation proceedings, an automatic stay will commence when the application for rehabilitation is legally accepted by the court.For example, no action shall be brought to the court for adjudication to dissolve a debtor company.An exemption froman automatic stay would apply for those creditors who provide fundsto thedebtor after the rehabilitation plan is approvedby the court so that they mayenforce their rights when the debt matures.
Thailand does not recognizeany insolvency proceedings or court orders regarding absolute receivership or an automatic stay under the laws of other countries.The Thai Bankruptcy Court is also not equipped with anyspecific means to enforce its ordersabroad. Enforcement will be based on reciprocal arrangements between Thailand and the relevant countries.
What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?
Business rehabilitation proceedingsare a court-supervised formal attempt to rehabilitate the distressed debtor. An automatic stay will commence when the petition for rehabilitation is legally accepted by the court. The debtor can continue to operate its business. An interim executive will be appointed by the court to have the powers and duties to manage the business and assets of the debtor (under the supervision of the official receiver) until a plan preparer is appointed to prepare the business rehabilitation plan and to take over the powers and duties from the interim executive. Once the creditors’ meeting adopts a resolution approving the proposed plan, with the court’s confirmation and agreement of such plan, the court will issue an order to approve the plan. As a result, the powers and duties to control the business of the debtor will be transferred from the plan preparer to a plan administrator to execute the approved plan.
Rehabilitation proceedings can be commenced if it appears that a debtor is indebted to one creditor or more for a definite amount of not less than Thai Baht 10 million, regardless of whether such debt is due immediately or not, and that there are reasonable grounds and the possibility to rehabilitate the business of the debtor.
Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?
Generally, it is possible to obtain new financing when essential andas may be approved under the rehabilitation plan. In this regard, the creditors who inject the new funds are entitled to repayment according to the time periods stipulated in the business rehabilitation plan.In addition, in a situation wherenew financing, which is incurred by the plan administrator, is provided after the court has approved the rehabilitationplan, financing providers willnot be subject to the automatic stay and be ableto enforce their rights when the debt matures without filing a claim for repayment under the proceedings.
Can a restructuring proceeding release claims against non-debtor parties (e.g. guarantees granted by parent entities, claims against directors of the debtor), and, if so, in what circumstances?
Rehabilitation proceedings do not have theeffect of altering liabilities of non-debtor parties nor releasing claims against thenon-debtor parties. Also, the aforesaid proceedingsdo not render such non-debtor parties to be liable for any debt created under the approved rehabilitation plan unless they agree thereto.
Is it common for creditor committees to be formed in restructuring proceedings and what powers or responsibilities do they have? Are they permitted to retain advisers and, if so, how are they funded?
Yes, it is common that the creditors’ meeting may adopt a resolution to appoint a creditor committee empowered to monitor performance under the rehabilitation plan. There is no provision governing the retaining of advisers under the Bankruptcy Act. Therefore, unless contrary tothe rehabilitation plan, advisers may be retained by the creditor committees at their own expense.
How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any ability for either party to disclaim the contract?
Underrehabilitation proceedings, the continuing contractual relationships remainfully effective and enforceable, including the provisions related to termination, retention of title and set-off(provided that the parties comply with the relevant provisions under the Bankruptcy Act); except forcertain contracts in respect ofservices involved withpublic utilities (such as electricity, water supply, and telephone)where the service providers will not be allowed to terminate the contractand will not be able to suspend their services to the debtor, unless approved by the court. In respect of disclaiming, under certain circumstances if the official receiver findsthat the assets or contractual rights of the debtor are more onerous than the benefit to the debtor, the official receiver is entitled to refuse to accept such assets or contractual rights of the debtor. The official receiver may also request the courtfor cancellation or revocation of any transaction or transfer of assets that may enable any creditor to have an advantage over other creditors, or that is found to be a fraudulent act.
Similar to rehabilitation proceedings, under bankruptcy proceedings the debtor will generally be obliged to fully perform its obligations under contracts. Termination, retention of title and set-off provisions in these contracts remain fully enforceable (provided that the parties shall comply with the relevant provisions under the Bankruptcy Act).In respect of disclaiming,the official receiver has the same power as mentioned in rehabilitation proceedings as discussed above.
What conditions apply to the sale of assets / the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted? Are pre-packaged sales possible?
As a general rule, the sale of assets will be conducted through public auction by the official receiver. Other methods of sale, including pre-negotiated sales transactions,that tend to be the most convenient and beneficialfor the creditors, can also be used if approval is obtained from the creditors’ committee. The assets will be sold as free and clear of claims and liabilities.Security cannot be released without the creditors’ consent.The secured creditors’ options arediscussed in item 5 paragraph 2. There are no restrictions preventing the creditors from bidding or participating in a public auction.Pre-packaged sales are possible, provided that the consent from the creditors is obtained.
For the sale of assets underrehabilitation proceedings, the methodology would be included in the rehabilitation plan.
What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty? Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?
Generally, a director has a duty to conduct the business of the company with the diligence of a careful businessman. If a director causes loss to a company through non-compliance with this duty, the company or its shareholders can claim against the director for the loss suffered.Directors must also act in good faith and with care to preserve the interests of the company. If a director fails to discharge these duties, the company or its shareholders can make a claim against the director under the Thai Penal Code, in relation to fraud, or under the Corporate Offences Act.
Other parties could also be held jointly and severally liable with the companyfor damagehe or she is personally responsible for.The concept of piercing the corporate veil is not well implemented by Thai courts. The liability of the shareholders is generally separate from the liability of the company under Thai law. Subject to the above, shareholders’ liabilities are strictly limited to the full payment of subscribed shares in the dissenting company.In any event, specifically for certainexecutives of certain types of business organizations, the scope of liabilities of unlimited liability partnersin a registered ordinary partnership or the managing partners in a limited partnership will be unlimitedand jointly and severallyheld accountablefor all liabilities incur to such business enterprise according to the CCC.
Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?
No, directors will not be released from the liabilities incurred due to their previous actions and decisions when a company enters bankruptcy or rehabilitation proceedings.
Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition? Has the UNCITRAL Model Law on Cross Border Insolvency or the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments been adopted or is it under consideration in your country?
Bankruptcyor rehabilitation proceedings initiated under the laws of other countries are not recognized in Thailand and shall have no effect on a debtor’s assets in Thailand.
The UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments has not been adopted in Thailand.The Thai government, through the Legal Execution Department, Ministry of Justice is currently studying the effect of implementing relevant principles set forth under such Model Law on local bankruptcy and rehabilitation laws.However, we do not anticipate the enactment or adoption in the near future.
Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?
Foreign debtors incorporated abroadbut operating a business either by themselves or by representatives in Thailand at the time an application is made to adjudge such debtor as bankrupt, or within a period of one year prior to such application,may also enter into bankruptcy proceedings for realization of their assets located in Thailand. Rehabilitation proceedings are available to certaintypes of local debtors as specified by laws.
How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?
There are no specific bankruptcy or rehabilitation regimes in respect to a group of companies. The existing proceedings of certain debtors in a corporate group will not extend to the other entities in a corporate group. The bankruptcy or rehabilitation proceedings of each debtor in the group will have to be initiated separately.
Is it a debtor or creditor friendly jurisdiction?
Thailand’sinsolvency regime (both for bankruptcy and rehabilitation proceedings) is often viewed as a slightly pro-creditor, taking into consideration all statutory requirements that each party needs to comply with. Inbankruptcy proceedings, there could be possible bias against foreign creditors wherein the rightsof foreign creditors to participate inthe repaymentand treatment by the Thai courtsis generally based on the principle of reciprocity/comity between relevant foreign nations and Thailand.However, this principle will not be applied by the courtsfor the repayment underrehabilitation proceedings.
Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?
Sociopolitical factorsand the social context (for example, global financial crisis),from time to time, influence the outcome of the proceedings, andthe consideration of public interest would prevail in special circumstances.
There are no statutory provisions under Thai insolvency laws governing state support for distressed businesses.With respect to employees, the Social Security Office, a state-owned organization,will play a major role in helping withfinancial supportto the employees during unemployment.
What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?
Costs and time consumption are often the greatest barriers in bankruptcy and rehabilitation proceedings under the Thai legal framework. Generally, the proceedings in the Thai Bankruptcy Court are open ended by its very nature, for the reasons as follows:
The application of a creditor can be objected to by the debtor and other creditors. In this case the official receiver must conduct an interrogation before issuing the order. An interrogation must be conducted for each objection raised;and
In the case the stakeholders who submitted an objection under 1) above disagree with the official receiver’s order, the stakeholders can file an objection to the court against the order under separate proceedings (from the main proceedings for bankruptcy or rehabilitation) as subordinate proceedings, in which witness examinations will also be conducted separately.These subordinate proceedings will cause main proceedings to be suspended, temporarily,pending the outcome of such subordinate proceedings. Therefore, the total time required for all proceedings could be lengthy,taking into accountall possible argumentswhichcould be challenged by the dissenting parties,and alsopossible witness testimony as may berequired by the Bankruptcy Court itself.
There is no concrete proposal to reform the Thai restructuring and insolvency laws to address the issues under 1) and 2) above.
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